Final FATCA Regulations Are Issued

Last week the US Treasury Department and the Internal Revenue Service issued comprehensive final regulations implementing the information reporting and withholding tax provisions for foreign financial institutions under the Foreign Account Tax Compliance Act (FATCA).

The final regulations were developed in order to mark a key step in establishing a common intergovernmental approach to combating tax evasion, and to provide additional certainty for foreign financial institutions and foreign government counterparts by finalizing the step-by-step process for US account identification, information reporting and withholding requirements.

According to the Treasury, the final regulations were built on intergovernmental agreements developed and signed with foreign governments to facilitate the effective implementation of FATCA. The regulations will be effective from January 01, 2014. Till that date the transition provisions will apply to provide sufficient time for financial institutions to develop necessary systems. To avoid confusion and unnecessary duplicative procedures, the final regulations align the regulatory timelines with the timelines prescribed in the intergovernmental FATCA agreements.

The regulations extend and clarify the scope of payments not subject to withholding tax (they are certain grandfathered obligations and certain payments made by non-financial entities). More streamlined registration and compliance procedures are also provided for groups of financial institutions, including investment funds, and additional detail is given regarding foreign financial institutions obligations to verify their compliance under FATCA.

In addition, the US Treasury has agreed with foreign governments to develop two alternative model intergovernmental agreements that facilitate the effective and efficient implementation of FATCA. The models should serve as the basis for concluding bilateral agreements for the exchange of tax information with interested jurisdictions and help implement the law.

Seven countries have already signed or initialed such agreements, and the Treasury announced that Norway has now joined the United Kingdom, Mexico, Denmark, Ireland, Switzerland, and Spain as countries that have done so. Currently the Treasury is negotiating with more than 50 countries and jurisdictions, and more signed agreements are expected to follow in the near future.